EARNINGS FOR LOCAL HMOS STILL AILING: PRICE HIKES ARE NO CURE

Local health maintenance organizations continued an earnings tailspin in the first quarter, despite modest price hikes to customers.

For many companies, losses were not unexpected. Farmington Hills-based Care Choices HMO posted a quarterly net loss of $1.2 million, while the Wellness Plan of Detroit and CareAmerica Michigan Inc. in Southfield continued their losing ways.

One company, Total Health Care Inc. in Detroit, is unaccustomed to quarterly losses. Yet Total lost $1.6 million in the first quarter on revenue of $20.5 million, according to regulatory filings with the state.

``We're not looking at a banner year,'' said Gene Farnum, executive director of the Michigan Association of Health Plans, a Lansing-based trade group representing 23 health plans in Michigan.

Farnum said earnings for HMOs may get worse before they get better.

Modest HMO price hikes of less than 5 percent went into effect in January. But those won't start hitting the bottom lines of health plans until the third and fourth quarters of this year, as contracts with employer groups come due, he said.

``The fourth quarter is the one to watch," Farnum said. ``We'll have a better idea then whether things are starting to come back.''

Even the HMOs that made a profit in the first quarter tended to see their earnings narrow. Detroit-based Health Alliance Plan, for example, posted net income of $3.2 million in the first quarter of 1998, compared with net income of $4.4 million in the same period a year earlier.

One company that improved its performance was Southfield-based Great Lakes Health Plan. Great Lakes emerged from a start-up phase a year ago to post net income in the first quarter of 1998 of $572,236, according to the state filings.

The HMO industry continues to be plagued by rising pharmaceutical costs, struggles with Medicaid price cuts and the high costs of launching Medicare HMO products, said Thomas Summerill, president of Mercy Health Plans, the Farmington Hills-based parent of Care Choices HMO.

Care Choices raised its prices for commercial customers between 3 percent and 5 percent in January, Summerill said. While that helped, it wasn't enough to boost Care Choices back into the black.

``If we hadn't raised rates, our results would have been worse,'' he said.

Care Choices posted a net loss of $1.2 million in the first quarter, compared with a net loss of $323,114 in the same quarter a year earlier. Revenue rose to $69.1 million vs. $66.3 million in the first quarter of 1997.

Summerill said pharmaceutical costs are rising from 10 percent to 18 percent annually.

The large pharmaceutical companies are hitting home with strong direct-marketing campaigns to consumers, resulting in demand for new drugs such as Viagra, the much-ballyhooed treatment for impotence, Summerill said.

Some HMOs may seek additional price increases to customers in light of close financial scrutiny by state regulators, he said.

Some states have turned down HMO rate-increase requests of 4 percent as too low to maintain a healthy balance sheet, he said.

While that hasn't been the case in Michigan, the state is taking a hard look at rates in the wake of financial problems at some HMOs, he said.

As Crain's reported last month, new state Insurance Commissioner E.L. Cox said he expects to have to deal with more companies such as OmniCare Health Plan in Detroit, which is under state supervision because of recent losses and deteriorating net worth.